• by Larissa Faw , June 9, 2015

MDC Partners held its annual meeting last Thursday (June 4) and the following day its stock dropped to a low for 2015.

The stock has continued to fall this week, dropping below the $20 threshold. In Tuesday morning trading the stock was down more than half a percentage point to $19.74. 

The annual meeting followed the company’s April disclosure that the U.S. Securities and Exchange Commission launched an investigation last October into the company’s accounting procedures and stock trading activity.

The investigation is ongoing, but company CEO Miles Nadal has agreed to pay back $8.6 million in red-flagged expenses he took during a five-year period that began in 2009. Michael Sabatino has stepped down as Chief Accounting Officer -- a post he had held since 2007 -- to work on unspecified “special projects” at the company. 

Although the exact nature of the SEC investigation remains unknown, some sources are pointing to recent acquisitions involving Nadal as potential areas of concern.

Last year, Union Advertising Canada, an MDC Partner firm, acquired digital advertising shop Trapeze Media Limited, of which Nadal was the majority owner, for $5.3 million. In addition, Trapeze provides Web site development and related marketing services to Peerage Realty Partners and Peerage's subsidiary Baker Real Estate, both of which Nadal founded and is majority equity owner of.

These companies paid Trapeze more than $320,000 last year, meaning that two Nadal-owned companies were paying another Nadal-owned company for services. That said, there is nothing to illustrate that this transaction was illegal. The company followed all its internal guidelines. The company’s Code of Conduct requires directors and employees to avoid activities that could conflict with the interests of MDC Partners, except for transactions that are disclosed and approved in advance.

Nadal recused himself from all Board discussions relating to Trapeze.  

While the company’s stock continues to fall in the wake of the SEC investigation disclosure, many investors appear to be standing behind the holding company’s management and board -- at least for now. All of its nominees for board director seats, including CEO Nadal, who is also chairman of the board, were elected by a large majority during the meeting which was held in New York City. 

The company’s business success seems to be at least part of the reason for that ongoing support. "The event was well attended and really spoke to the strength of the bench at MDC Partners," says one analyst, noting that its recent account win of Infiniti was particularly impressive.  

MDC is also demonstrating good governance by being proactive about potential concerns, say analysts who cover the company. Last year, MDC Partners paid Nadal $16.8 million in compensation, along with underwriting other perks, such as $91,038 in aircraft costs to fly him from his home in Nassau, Caribbean, according to its 2015 proxy statement. 

In the shadow of the current SEC investigation (but before its public disclosure), the holding company took steps to prevent shareholder outrage over excessive compensation. Last year ,68% of MDC Partners shareholders approved a non-binding resolution in support of its executive officer compensation program which was below what the company deemed “satisfactory."  The firm undertook what it called a "concentrated effort" to focus on shareholder outreach and solicitation of feedback during the course of 2014 and in the first quarter of 2015.  

As a result, MDC Partners is introducing several changes to its compensation program.

First, unlike prior years when pay was based on subjective factors, incentive awards are now based solely on achieving financial targets and hitting certain other objective targets. Also, MDC has discontinued a legacy policy of granting long-term awards that vest solely based upon the lapse of time or continued employment. Instead, the company is introducing key financial performance metrics that must be achieved in order to trigger cash payments in future periods.

The company is also removing and eliminating time-based vesting requirements for new equity incentive awards. Accordingly, any and all new grants in 2015 and subsequent years to executive officers will contain financial performance-based vesting requirements. 

Although the company believes that its primary competitors remain Interpublic, Omnicom and WPP, the firm’s Compensation Committee is expanding its list of peer companies in its comparator group in order to better assess relative financial performance and shareholder returns.

This expanded peer list includes Arbitron, Central European Media, Dreamworks Animation, John Wiley, Lamar Advertising, Meredith Corporation, National CineMedia, Sinclair Broadcast, McClatchy, and Valassis. There is also a recently implemented “claw back” provision for certain stock incentive awards applied to awardees who resign or are terminated for cause prior to December 31, 2016.